Transcript Exit or not: Memo to the Greek prime minister

Grexit: Memo to the Greek prime
minister
The Crisis at a Glance
Euro Area : The monetary union fundamentally lacks adjustment mechanisms to compensate for
a lack of intra-regional nominal exchange rate adjustment. 1999-07 was phase of strong capital
flows to peripheral countries; sharp reversal of these flows since has become increasingly
stressful. Limited intra-regional labor mobility and, especially, pooled fiscal resources, puts
adjustment burden on deficit countries’ government finances and creditworthiness. Financing
programs currently funded by the EFSF, to be replaced by the ESM starting july 2012 following
agreement on a new set of fiscal rules and changes to bailout funds, including the availability of
a full €500 billion lending capacity from july on.
The Crisis at a Glance
Greece: Sovereign lost bond markets access in May 2010. Dependent since on IMF7EU loans to
fund fiscal deficit and redeem maturing term debt. General government debt rose to €360 billion
at end-2011, of which €73 billion was owed to the IMF/EU. Eventual return to markets still
considered doubtful despite €107 billion in debt reduction, reduced interest costs and deferred
maturities under debt restructuring terms now agreed with private bondholders. Economy in deep
recession; competitiveness inproving under pressure of high unemployment and large reductions
in public sector wages but lagging reforms continue to hamper adjustment and constrain activity.
Implementation will remain difficult amid rising popular discontent and lost faith in political
leadership.
Options for the Greek
Government
• Continue course, by further implementing austerity measures, staying in the Eurozone.
• Greece defaults on its public debt, but decides to stay in the Eurozone.
• Greece defaults on its public debt and abandons the Eurozone.
Accept austerity measures – Stay
in the Eurozone
•
•
•
•
•
•
Pros
Credibility
Currency and Interest Rate stability inspires
confidence in the international investment
community
Enables smaller countries and local firms to
borrow at much lower cost from the markets
Economic Integration  Growth for Euro
Zone Overall
Increased growth prospects of all members
Homogenization of political, institutional and
financial regulatory environment creates a
robust system
Increased Trade & Capital Inflows
Minimal transaction costs (i.e. Currency Risk)
Fiscal Support Mechanisms (“Cohesion Fund”)
/ Access to EU Structural Funds
Investment Fund since 1994 to help reduce
economic and social disparities
Implementation of structural changes
Structural changes required to be done within
the Greek economy
Greece to remain a member of the European
Union
•
•
•
Cons
Austerity Measures
Austerity measures deepen the economic
recession. Current estimates indicate -5.6%
GDP Growth for 2011, -2.6% for 2012
Civil Unrest
Increasing discontent against EU policies
and the domestic political establishment
No current cohesive plan to spur
investments and growth
Current memorandum lacks planning for
future growth opportunities
Disorderly Default on Public Debt
– Stay in the Eurozone
•
•
•
•
•
Pros
Credibility
Currency and Interest Rate stability inspires
confidence in international investment
community
Enables smaller countries and local firms to
borrow at much lower cost from the markets
Increased Trade & Capital Inflows
•
•
Minimal transaction costs (i.e. Currency Risk)
Fiscal Support Mechanisms
(“Cohesion Fund”) / Access to EU
Structural Funds
Investment Fund since 1994 to help reduce
economic and social disparities
Implementation of structural changes
Structural changes required to be done within
the Greek economy
Fiscal Metrics become sustainable
faster
•
Cons
Huge losses on domestic Greek Debt
creditors/ Bank runs
Collapse of the domestic banking
system and pension system
Breach of Capital Markets Trust
Markets have a strong memory–
return on public markets may be
severely prolonged
Contagion effect
Once Greece abandons the Eurozone,
the entire Southern periphery may
come under speculation attack
Disorderly Default on Public Debt
– Leave the Eurozone
•
•
•
•
Pros
Independence of monetary policy
Regain control over money supply and floating
exchange rate
Increased Trade & Capital Inflows
A weaker exchange rate could pose a valuable
investment thesis for investors or foreign
importers
Avoidance of prolonged recession/ austerity
measures
Economic and employment growth may
resume right away
Fiscal Metric become sustainable sooner
•
•
•
•
•
•
•
Cons
Huge losses on domestic Greek Debt creditors/
Bank runs
Collapse of the domestic banking system and
pension system
Drachmatization of all EUR assets and liabilities
Losses on EUR denominated holders of Greek
claims
Excessive Macroeconomic Imbalances
Inflation would shoot up 30%-40%
Breach of Capital Markets Trust
Markets find it hard to forgive – return on public
markets may be severely prolonged
Trade, Tariffs and Protectionism
In the event of a domestic devaluation
foreign unions are likely to greet the new
currency with increased protectionist sentiment
Departure from the EU
A country departing from the Eurozone is
departing from the Union as well
Contagion effect
Once Greece abandons the Eurozone, the entire
Southern periphery may come under speculation
attack
Recommendation
Thesis: Stay in the Eurozone, while orderly restructure
public debt


Promising signs for a brighter future
Signs of fiscal convergence: Public debt evolution looks promising – given completion of the PSI
and the realization of $50bio in privatization revenue.
 Primary Balance deficit reduced from -11% FY09 to -2% FY11.
New Memorandum passed last week by 2/3 of the Greek Parliament shows political unity on a
common goal.
 Specific sectors of the Greek Economy to start enjoying the benefits of real currency
devaluation, with tourism receipts in 2011 showing a 20% increase.
But more things need to be accomplished
 The long-anticipated privatization plan of state owned enterprises needs to start realising.
 Greek politicians and policy makers need to abandon practices of the past and unite under the
common goal of saving the country from a financial disaster.
 European authorities need to provide the Greek public with a promising vision. A new Marshall
plan for Greece needs to be devised mobilizing EU structural funds and institutions (EIB)
 Eliminate the deflationary bias with the ECB acting as a lender of last resort or through the
issuance of Eurobonds.
 European countries and primarily Germany need to abandon the public critical stance against
the Greek people and become part of the problem’s solution rather than a source of
conservatism and ambiguity
Appendix
Appendix
Appendix
Inflation Levels in core Eurozone
economies
German Benefits from the Euro Adaption
Appendix
Creditors of Greek Debt
Appendix